Trump Tower Woes Signal Top of Toronto Condo Market

Herbert Crockett said his late
father suggested investing in something he could touch, so he
put cash into Donald Trump’s latest hotel project in Toronto
where he could feel the marble under his feet.

Crockett, a 75-year-old retired human resources director at
the World Health Organization, said he bought a C$904,000
($918,000) hotel-condominium suite at the Trump International
Hotel & Tower, Toronto, attracted by a presentation that showed
he could make as much as 27 percent a year on his investment.
Crockett is now suing Trump and the hotel’s developers for C$2.6
million, and says he’s losing C$7,000 a month because the unit
he rents out is occupied on average about a quarter of the time.

“We bought into the Trump name and what we were being told
was a hot real estate market in Toronto for this kind of
project,” Crockett said in an interview. “It turns out that
the hotel had nothing to do with him and that it isn’t a good
investment after all.”

The brewing legal trouble is the latest sign that the real
estate boom in a city with more skyscrapers under construction
than any other in the world may be cooling as sales drop and
prices climb. Canadian Finance Minister Jim Flaherty tightened
mortgage lending rules in June and criticized “continuous
building, without restriction” of condos. The central bank said
last month that record consumer debt and the chance of a sudden
housing correction are major risks to the economy.

“When people buy units purely as an investment and not to
ever live in, it’s a sign that the Toronto market is on thin
ice,” John Andrew, a real-estate professor at Queen’s
University in Kingston, Ontario, said in a phone interview.
“The luxury market always feels the cracks of a housing market
first. Here we have the canary in the coal mine.”

Tallest Building

The Trump Toronto, the tallest residential building in
Canada when it opened in January, is suffering from low
occupancy and its residents are unable to get the financing
promised to them, about two dozen buyers allege in their
lawsuits against the Trump Organization and the tower’s
developer Talon International Development Corp.

Donald Trump was not involved in selling the properties,
said Alan Garten, personal legal counsel for the New York-based
Trump Organization Inc. “These allegations are completely
without merit,” he said in an email. “Trump was not involved
in the sales process and Talon, the developer, made no
representations to buyers regarding return on investment.”

Billionaire Donald Trump was featured on advertising
material for selling the hotel suites, his photo and comments
praising the building appeared in magazine advertorials that
highlighted the investment potential of the suites. He sold
rights for the hotel to use his name and trademark via Trump
Marks LP, his company that owns the Trump brand. He attended the
tower’s opening in April. Donald Trump declined to comment
through his attorney.

‘Unbelievable Success’

“We look forward to continuing to achieve great success at
Trump International Hotel & Tower Toronto,” Ivanka Trump,
executive vice president of development & acquisitions of the
Trump Organization said in an emailed statement. “Our team is
dedicated to providing world-class service and amenities only
found in a Trump Hotel Collection property.”

“The hotel is an unbelievable success,” Garten said,
pointing to the hotel restaurant’s four diamond rating awarded
by the Canadian Automobile Association and to review website
TripAdvisor.com where the Trump Hotel occupies the number one
spot for the city. Garten and Talon didn’t provide data on hotel
occupancy.

Not Sophisticated

Crockett, who lives in Crozet, France, says he is “the
victim of an investment scheme and conspiracy based upon
reckless and negligent misrepresentations,” according to his
statement of claim filed in the Ontario Superior Court on Dec.
5. The developer promised him between 5 and 27 percent return on
investment, that the hotel unit was a safe investment with an
annual cash flow, and that he could easily secure financing, he
said. None of these projections materialized and Talon has
avoided his questions in emails and phone calls, he said.

“These are not sophisticated investors,” said Javad
Heydary, chief executive officer of Heydary Hamilton PC, the law
firm representing Crockett and 20 other investors suing the
developer and Trump.

The sales agreement is with Markham-based Talon
International, the closely-held real estate development firm,
according to the Agreement of Purchase and Sale, the document
signed by buyers. The company is led by CEO Val Levitan and
chairman Alex Shnaider, the 43rd-richest Canadian with a net
worth of C$1.5 billion last year on Canadian Business magazine’s
Rich 100 list. Talon markets, sells, and manages finances for
the units. Trump Toronto Hotel Management Corp. takes care of
the suites.

Potential Returns

The return on investment document shown to potential buyers
outlines possible returns based on a 55 percent to 75 percent
occupancy rate. Below the chart it reads: “This is not a
guaranteed investment program.”

Another document that buyers signed known as the disclosure
statement highlights the risks of buying a suite, including
competition from other luxury hotels, periodic oversupply of
rooms, and economic downturns.

The Trump Toronto is a 65-story project with 118
traditional condos and 261 hotel-condo suites that don’t have
kitchens. The buyer has the option of renting the hotel unit to
guests through a reservation program.

“These kinds of developments are fraught with problems,”
Andrew at Queen’s said. “Hotel-condos are at the high-risk end
of the spectrum for commercial investment. You really have to
wonder in terms of how much of a market there is for that in
Toronto.”

Trump Paper

The hotel suites, where guests can watch a television
embedded in the bathroom mirror and the toilet paper is stamped
daily with a capital “T” for Trump, start at C$967,000 for a
571-square-foot unit. They run up to C$3.1 million for a two-
bedroom unit that’s about 1,600 square feet. The condominiums
sell for C$2.3 million to C$6.6 million and the “super
penthouse” unit, the most expensive in the building, is owned
by Shnaider.

“When we entered the market we were perceived as renegades
and cowboys,” said Talon’s Levitan, seated in an ivory leather
armchair in one of the largest suites, facing Lake Ontario. When
other luxury hotels opened, “it validated our business model,”
he said.

The hotel-condo units were not sold as an investment, he
said. Banks and corporations purchase the hotel-condo suites to
house their employees who are on business trips, and locals in
Canada’s biggest city buy them as a so-called pied-a-terre,
Levitan said. He denies the lawsuit’s allegations, saying it’s a
case of “buyer’s remorse” and they reflect “a decision to get
out from the deal.”

Bullion Chocolate

The hotel suites, which are supplied with gold bullion-
shaped chocolate bars emblazoned with Trump’s name, are 80
percent sold, while the condo units are more than 60 percent
sold, said Talon’s spokeswoman Dorenda McNeil in an email. All
unsold hotel suites belong to Talon.

“The market can definitely handle a thousand more rooms
among the ocean of other hotel rooms,” Levitan said, his red
cufflinks clicking against a glass-covered table.

The Toronto housing market is due for a soft landing,
according to Bank of Nova Scotia, the country’s third-biggest
bank. Housing demand will weaken next year as foreign and
domestic buyers reduce purchases, which could squeeze sales
volume and prices in markets like Toronto, according to the
bank’s senior economist Adrienne Warren.

Housing Supply

“We’re currently in a state of housing oversupply,”
Warren said in a phone interview from Toronto. “Next year, we
can expect sales to slow down and a cooling in new projects
being launched with additional units coming onto the market at
the same time.”

Toronto condo sales declined 21 percent in the third
quarter and the average price in Toronto rose less than 1
percent this year to C$357,030. The average sale price for a
home surged 33 percent to C$334,204 in 2011 from C$251,208 in
2001, according to the city’s real estate board.

The Trump tower competes with four other luxury hotels
offering condo components, all of which opened in the past two
years: the Ritz-Carlton, the Shangri-La Toronto, the Four
Seasons Hotel Toronto and the Thompson Toronto. Trump’s hotel is
the only one that offers hotel rooms for individuals to
purchase.

“We’ve suddenly got a glut of luxury hotel rooms flooding
the market and it will take time for the market to absorb
them,” said Charles Suddaby, a vice president of hospitality
sector valuation and advising in Toronto at Cushman and
Wakefield Inc., a real estate brokerage firm. “It may take
eight years for the project to get absorbed and gain a profit.
It’s a shock to the system at the moment.”

Payment Deadline

The investors suing Talon and Trump didn’t pay the
remaining purchase price by the Dec. 13 deadline and Talon filed
a statement of defense and a countersuit for C$750,000 against
the first four buyers to file lawsuits. In the claim, Talon says
it hasn’t provided “any false or misleading marketing and
promotional materials.”

Crockett, visiting Toronto, said he won’t be investing in
the city’s real estate market again.

“There’s the illusion of movement in the Toronto housing
sector with sales and buyers,” he said, glancing outside a cafe
onto the evening rush-hour crowd surging along Bay Street past
his investment property 24 stories above. “But now it seems
more like a Ponzi scheme.”